PROP 1023 PROJECT 1

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Langara College *

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1023

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Finance

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Jan 9, 2024

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PROP 1023: REAL ESTATE FINANCE PROJECT 1 Submitted To: Dennis Ragaukas Submitted By: Tanvi Banga Student Id: 100334360

ANSWER 1 (a) Lending Value 5 years ago = $250,000 Increment = 30% So lending value: $250,000 x 0.30 = 75,000 $250,000 +75,000 = $325,000 current lending value = $325,000 loan to value ratio = 80% maximum value = loan to value ratio * current lending LA = (LTVR) (LV) = (0.8) ($325,000) LA = $ 260,000 (b) five years ago five year term mortgage rate = 4.64% (as per bank of Canada) loan amount = $187,500 since the mortgage term is of five years UN monthly installment so we have taken 5 year term mortgage rate is compounded monthly Amortization Period is 25 years , N = 300 Calculation of PMT and Outstanding balance at the end of 5-year term 5.34 shift NOM% 5.34 2shift P/YR. 2 Shift EFF% 5.41 12shift P/YR. 12 Shift NOM% 5.28 300N 300 $187,500 PV 187,500 0FV 0 PMT -/+ -1,127.08 60 INPUT shift AMORT OSB60 166,824.88 PMT = $1,127.08

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OSB 60 = $166,824.88 (c) Combines Monthly Income $5,500.00 Annual Property Tax $2,000.00 Gross Debt to Service Ratio 32% GDSR = (PMT + T) / GI PMT = (GDSR x $66,000) – $2,000 PMT =21,120 – 2,000 PMT =19,120/12 PMT = $ 1,593.33 (d) Five year term mortgage rate 4.79% (as per Bank of Canada) Maximum monthly payment = $1,593.33 Amortization Period = 20 years N = 240 Calculations of Maximum Loan 4.79 shift NOM 4.79 2shift P/YR 2 Shift EFF% 4.84 12 Shift P/YR. 12 Shift NOM% 4.74 1,593.33+/- PMT. -1,593.33 240 N 240 0 FV 0 PV $2,46,708.42 Maximum Loan Available = $2,46,708.42 (e) maximum loan allowed $2,46,708 Loan Outstanding Balance $1,66,824.88 < new Mortgage = $246,708 New Mortgage = $246,708.42 – Old Mortgage $187,500 = $ 59,208.42 additional on second mortgage. ANSWER2-

(a) Calculation of net operating income (NOI) for the 1 st year No. of suits = 50 Average rent for suit = $900.00 per month Parking revenue = $10,000 per month Vacancy allowance for apartment = 2% Vacancy allowance for parking = 0% Bad debts = 0% Operating Expenses $2,15,000 50*900*12 = 540,000 Other income = 10,000*12 = 120,000 Gross potential Income = 540,000 + 120,000 = 6,60,000 Vacancy = 660,000*2% = 13,200 Effective Gross Income = 6,60,000 -13,200 = 6,46,800 Net operating Income = Effective Gross Income – Operating expenses = 6,46,800 – 215,000 = 4,31,800 (b) Lending Value = net operating Income / Market Capitalization rate = 4,31,800 / 9% = $4,797777.77 (c) (i) Maximum Loan Amount = Loan to value ration * lending Value = 70% * 4,79,7777.77 = $3,358,444.44 (ii) Safety margin 15% of NOI = 85% * 4,31,800 Maximum Annual Payment = $367,030 Maximum Monthly Payment = 367,030 /12 = $30,585.83

J2 =4.64% J12 = 4.595772319 Payment = -30,585.83 FV = 0 N = 180 PV = $3,972,716.90 The largest loan the net operating income will support $397,716.90 (iii) Maximum Annual payment = Net Operating Income /Debt Cover Ratio = 4,32,800 /1.25 = $ 345,440 Maximum Monthly Payment = 345,440 /12 = $28,786.7 Monthly Payment = $28,786.7 J2 = 4.64 % J1 = 4.693824000 J12 = 4.595772319 N = 12*15 =180 FV = 0 PV = $3,739032.41 Maximum loan = $3,739032.42 (d) Maximum Loan = $ 3,972,716.90 ANSWER 3-

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Year Mortgage Rate 2000 7.20% 2001 5.95% 2002 3.95% 2003 4.45% 2004 3.70% 2005 3.95% 2006 5.70% 2007 5.70% 2008 4.45% 2009 1.95% 2010 2.20% 2011 2.70% 2012 2.70% 2013 2.70% 2014 2.70% 2015 2.55% 2016 2.40% 2017 2.40%

2018 3.15% 2019 3.65% 2020 2.15% 2021 2.15% Reference- https://www.superbrokers.ca/tools/mortgage-rate-history 2000200120022003200420052006200720082009201020112012201320142015201620172018201920202021 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% Mortgage Rate Mortgage Rate The line graph illustrates the significant fluctuations in the mortgage rate between the years 2000 and 2021. Over a period of two decades, the lowest mortgage rate, occurring in 2009, was recorded at 1.95%, while the highest rate, observed in 2000, reached 7.20%. From 2000 to 2002, the mortgage rate experienced a steady decline, dropping to approximately half its initial rate, from 7.20% to 3.95%. Subsequently, in 2003, the rate increased to 4.45% before slightly decreasing to 3.70% in 2004. Between 2005 and 2007, there was an insignificant rise to 3.95% in the mortgage rate, which continued with a variable rate of 5.70% during the years 2006 and 2007.

However, from 2008 to 2011, the mortgage rate steadily decreased to 2.70% and remained constant until 2014. Subsequently, the rate fell further to 2.40% in the following three years. There was a slight increase in the mortgage rate, reaching 3.15% and 3.65% in 2018 and 2019 respectively, before decreasing to 2.15% in 2020, which remained the same in 2021 as well. ANSWER 4- Mortgage Comparison MORTGAGE TYPE OVERVIEW KEY FEATURES CIBC Fixed Rate Mortgage Mortgage with fixed rates, open or closed. Durations ranging from one to ten years Rates: 5.49%, 5.49%, 5.39%, 6.49%, 7.00%, 7.49%Mortgage paired with Up to 10% of your initial mortgage principal may be repaid in advance. Annual CIBC Fixed Rate Amount (For Closed Mortgage) set prices, accessible Up to a 100% increase in the number of regular payments (principal, mortgages, or closing interest) on any regular payment made during the term; the additional payment amount is applied straight to the principle. Transfers Period: weekly, fortnightly, every two weeks, or every month RBC Fixed Rate Mortgage Mortgage with fixed rates, closed only. Terms ranging from 2 to 5 years Rates 4.54%, 5.10%, 5.34%. Increase the amount of double-up. Regular payments can be increased by up to 100% on any regular payment date during the term. Making principle payments, which raises your monthly payments. Monthly, semi-monthly, bi-weekly, weekly, accelerated bi-weekly, and accelerated weekly payments are all

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available. If you ever need extra money, you can miss a mortgage payment once every 12 months. CIBC Variable Rate Mortgages Mortgage with variable rates, open or closed A fixed monthly mortgage payment. If the CIBC Prime rate falls, more of your payment will be applied to the principal. Rate of 3.70% (July 10,2022) Prepay up to 20% of your original principal mortgage amount annually, and raise regular payments (principal and interest) by up to 100% on any regular payment date during the term, with the extra payment amount applied directly to the principal. (For a closed mortgage) Convertible mortgage payments can be made weekly, biweekly, semi- monthly, or monthly. RBC Variable Rate Mortgage Mortgage with variable rates, closed only. A mortgage payment that is fixed each month. If the interest rate falls, a larger portion of your payment will be applied to the principle. Rates APR of 3.380% (starting July 10, 2022) Increase the number of monthly payments (principal and interest) by up to 100% on any regular payment date during the term by making Double-Up Payments. Increasing Your Monthly Payments by Making Principal Prepayments. Monthly, semi-monthly, bi-weekly, weekly, accelerated bi-weekly, and accelerated weekly payments are all available. If you ever need extra income, you can skip a mortgage payment once

every 12 months: this can be transferred to another term at any time. CIBC Cash Back Offer Cash back mortgage offer based on mortgage amount and term, Variable and Fixed rate, open or closed. Rates 3.35% Variable rate APR of 3.37% (beginning July 10, 2022). mortgage offer Terms of 2, 3, and 5 years at rates of 4.54%, 5.10%, and 5.34%. based on Cash mortgage back of up to $3,000 depending on the amount borrowed. Prepayment can be as much as 20% of the original cost and mortgage amount per year, depending on the product term and variables chosen. (For a closed mortgage) Increase the number of regular payments (principal and fixed rate, interest) by up to 100% on any regular payment date, open or closed. Within the term, with the excess payment amount transferred immediately to the principal

ANSWER 5- the key feature of private mortgage insurer against the CMHC mortgage loan insurance program are: BASIC CMHC SAGEN CANADA GUARANTY Type of corporation Federal crown corporation Private corporation Private corporation Plans It typically acts as the market maker, which, means it is responsible for determining the rate of premium in the market As per the Standard protocol they follow CMHC As per the Standard protocol they follow CMHC No. of products Limited or very less variety of products to offer Provide wide selections of products Provide wide selection of products Minimum Equity requirement 1-2 Units : 5% of the first lending value and 10% of the remaining value Property value must be less than maximum 4 units where 1 unit must be owner occupied Resale or new constructions. Maximum property value must be less than $1,000,000. Flexibility of products Product flexibility is limited Highly flexible Highly flexible Amortization Zero Maximum 25 years Maximum 25 years Target Customers Due to its status as Federal Crown Corporation, they have a modest economic bias. Particular demographic and socioeconomic groups are given more attention, and they place a greater emphasis on providing mortgage insurance for urban borrowers. Particular demographic and socioeconomic groups are given more attention, and they place a greater emphasis on providing mortgage insurance for urban borrowers. Answer 6- Project Research: https://www.canadianmortgagetrends.com/2022/07/is-inflation- nearing-a-peak-some-economists-think-so/ The website Canada Mortgage Trends serves as a reliable source of Canadian mortgage news for professionals in the real estate industry. The platform provides a comprehensive range of daily news and articles that effectively convey information pertaining to the financial aspects of our profession, hence facilitating a better understanding of this domain. According to the information provided on the website, CMT was established in 2006 with two primary objectives. The first

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objective is to ensure that mortgage professionals in Canada are well-informed about significant industry news and regulatory modifications, enabling them to effectively cater to their clients' needs. The second objective is to equip Canadians with the essential knowledge and resources required to make informed decisions on mortgages. The primary emphasis of the paper centers around two key aspects, namely the prevailing inflation rate and the mortgage interest cost index. The primary objective of the Bank of Canada is to restore inflation to within the target range of 1-3%. Given that the market had anticipated a higher inflation rate and seen a deceleration in prices, it is plausible to interpret this period as the pinnacle of inflation. Given the recent 1% increase in interest rates by the Bank of Canada, it may be assumed that the average mortgage rate stands at 4.5%. Consequently, the standard monthly mortgage payment would escalate from $3,000 to $4,700, unless there is a further fall in property values. It is premature to discuss a potential recovery in the property market at this stage. Given the sustained decline in average home prices in Canada over the past four months, it is anticipated that there will be a continued decrease in sales volumes and a further decline in property values. Currently, the primary determinant impacting housing markets is the cost of borrowing, surpassing the influence of supply. However, it is important to note that the supply issue remains unresolved. A significant proportion of individuals exhibit a preference for adopting a wait-and-see approach, allowing the market to stabilize, or relying on indicators pertaining to recent or anticipated rate hikes. Conversely, a smaller number of individuals actively participate in the market during periods characterized by adverse conditions. The potential consequences of the recent increase in interest rates on mortgage holders are noteworthy. Specifically, given that the prime rate has risen from 2.45% to 4.70% since the beginning of the year, these individuals may now be required to meet a stress test rate that is 200 basis points higher than their contracted rates, rather than the previously established range of 5- 25%. In order to qualify for a loan, borrowers are required to demonstrate their financial capability to meet the payment obligations as stipulated in their contractual agreement, augmented by an additional 2% or a minimum interest rate of 5.25%, whichever is greater. The stress test will be conducted with a high level of effectiveness, resulting in a reduction in purchasing power at around 6.20%. This decrease in purchasing availability is expected to have an impact on the housing

market. The decline in prices can be attributed to the concurrent increase in borrowing costs, which is a result of rising fixed rates and rate hikes implemented by the Bank of Canada. However, the impact of this rate hike on financial figures has not yet been observed or accounted for. Although it is anticipated that the impacts will be detrimental and will have an impact on the average prices. Residential investment is expected to exert a significant negative impact on a potentially imminent economic downturn. This compilation of news and articles serves as a valuable resource for real estate practitioners, facilitating a comprehensive comprehension of the financial landscape within the real estate industry. The recent increase in interest rates has significant implications for those with mortgages. Specifically, given that the prime rate has risen from 2.45% to 4.70% since the beginning of the year, mortgage holders will now need to meet a stress test rate that is 200 basis points higher than their contracted rates. This requirement contrasts with the previous minimum range of 5-25%. In order to qualify for a loan, borrowers are required to demonstrate their ability to meet payment obligations, which are determined by their contractual agreement augmented by either a 2% or 5.25% threshold, whichever is greater. The stress test will be conducted with an effective rate of approximately 6.20%, resulting in a reduction in purchasing power and therefore impacting the housing market. The decline in prices can be attributed to the concurrent increase in borrowing costs, which has been influenced by the rising fixed rates and the rate hikes implemented by the Bank of Canada. However, the full impact of this rate hike on financial figures has not yet been observed or accounted for. Although it is anticipated that the impacts will be detrimental and will have an impact on the average prices. Residential investment is expected to exert a significant negative impact on a potential future economic downturn. This collection of news and articles serves as a valuable resource for real estate practitioners, facilitating a comprehensive comprehension of the financial real estate landscape.